59 lines
4.3 KiB
Markdown
59 lines
4.3 KiB
Markdown
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# Chapter 7. Detailed Analysis
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Use Monte Carlo Analysis at later stage.
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## What is Monte Carlo Analysis/Simulation
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Author's Monte Carlo Simulation Excel sheet is not appropriate for me, read
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* [Monte-Carlo Simulation Engine](https://medium.com/fintechexplained/monte-carlo-simulation-engine-in-python-a1fa5043c613) for reference
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Benefit of Monte Carlo Simulation, Answering following questions:
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* What's my **risk of ruin (account get wiped out)** for a given account size?
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* What are the chance of my system's having a maximum drawdown of X percent? (How dangerous is my strategy)
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* What kind of annual return can I expect from this trading system?
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* Is the risk I am taking to trade this strategy appropriate? for the return I am receiving?
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## Inputs to Monte Carlo Simulation
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* **Base Starting Equity**
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* **Stop Trading if Equity Drops Below $**: threshold consider account "ruined"
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* **# Trades, 1 Year**, (not so important for me)
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* **Individual Trade Results** (should be calculated by python)
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## Simulator Output
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Output sheet should contain:
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* **Starting Equity**
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* **Risk of Ruin**: within a year's time, the percentage of account drop below threshold
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* It's obvious that larger starting equity mean lower chances of ruin
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* **Median Drawdown**: Median value of **maximum drawdown**. Maximum drawdown is the maximum percentage drop in account size from an equity peak (measured from the previous equity peak).
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* e.g. $5,000 drawdown, after peak equity of $20,000 = $5,000 / $20,000 = 25 percent drawdown
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* For every simulation iteration, there will be one maximum percentage drawdown. Then iterations form a distribution (from 0% to 100%). Median is from this distribution.
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* No reason why use median, also can use mean if it makes more sense.
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* **Median $ Profit, Median Return**: similar as median drawdown
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* **Return/Drawdown (aka Calmar Ratio calculated over 3-year)**: Considered most important.
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* This ratio shows "it takes Y risk to make X"
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* Higher, the beteer
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* **PROB > 0**: the percentage that the system will make money in the first year of trading.
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Important Performance Parameter
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| Parameter | Source | Utilized During | Threshold |
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| ----------------------------------------- | ---------------------- | --------------- | ------------------------------------------------ |
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| Total net profit | Performance Report | Initial Review | ~$10K per year per contract |
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| Profit Factor | Performance Report | Initial Review | > 1.0 OK, > 1.5 ideal |
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| Average trade net profit | Performance Report | Initial Review | >$50 per contract |
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| Tharp Expectancy | Performance Report | Initial Review | >0.10 |
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| Slippage and commission | Performance Report | Initial Review | Discard if $0, otherwise $5 commission 1-2 ticks |
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| Maximum Drawdown | Performance Report | Initial Review | Should be much smaller than total net profit |
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| Equity curve Slope | Equity Curve | Initial Review | Ideally rises at 45-degree angle |
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| Equity curve flat periods | Equity Curve | Initial Review | Short in duration |
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| Equity curve drawdown, depth and duration | Equity curve | Initial Review | Proportional to overall curve |
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| Equity curve fuzziness | Equity curve | Initial review | Small is ideal |
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| Risk of ruin | Monte Carlo simulation | Detail review | < 10% |
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| Median maximum drawdown | Monte Carlo simulation | Detail review | < 40% |
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| Median % return | Monte Carlo simulation | Detail review | > 40% |
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| Return/drawdown ratio | Monte Carlo simulation | Detail review | >2.0 |
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